In looking to create a charitable vehicle, you may be considering whether to establish a private foundation or a donor advised fund (DAF). At the most basic level, the difference between a DAF and a private foundation is the construct, or form, in which each entity is created and operated.
Private Foundation - A wholly distinct, tax-exempt legal entity governed by its own set of bylaws, articles of incorporation and board of directors.
Donor Advised Fund - a giving account that is offered by and housed in a public charity, which may be connected to a community foundation, a financial institution, or university.
A difference in structure may sound like a trivial distinction, but when comparing private foundations and donor advised funds, it turns out that form really does dictate function. Because a private foundation is a freestanding, legal entity, and a donor advised fund is in account, the two charitable vehicles offer very different levels of control, authority, and philanthropic versatility. The differences between private foundations and DAFs are highlighted on the following chart. As DAF policies and procedures vary by the sponsoring organization, the information on this chart is based on standard common practice.
Grantmaking Differences
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Investment/Asset Management Differences
Contribution Differences
NOTE: Contributions to private foundations and donor advised funds that exceed their respective annual limits can be carried over in each of the next five years until used up.
What is the Bottom Line?
Ultimately, your choice of a philanthropic vehicle must be consistent with your financial goals. The tax deductions associated with private foundations and DAFs are important to understand. DAFs are frequently promoted as the better wealth management solution because they offer higher tax deduction limitations.
In practice, tax deduction limitations do not typically represent a barrier to private foundation donors:
- Many individuals do not reach the Adjusted Gross Income (AGI) limits on tax deductions. When they do, contributions that exceed the respective annual limits can be carried over to subsequent years.
- Contributions can be made both to a private foundation and to a public charity in a single year, so if the maximum 30% AGI limit of cash contributions to the foundation is reached, additional cash contributions of up to 30% AGI can be made directly to one or more public charities, including DAFs.
- Private foundations and DAFs do not present an either/or proposition. In many cases, using a private foundation and DAF together can be the optimum solution for managing wealth and achieving philanthropic impact.
Private foundations typically require more involvement than DAFs, but they also provide more control over the investments and the grantmaking, which appeals to some donors, particularly those who are more entrepreneurial.
